Analysis: Clash of the Titans - Oracle v SAP

By Stuart Lauchlan, news and analysis editor

Relations between Oracle and SAP have never exactly been great. Well, not since Oracle decided to make a major push into the applications space after SAP had come to the (hardly unexpected) conclusion that its client server R3 flagship product would be built on the Oracle database.

For Oracle it was something of the cliched marketing win-win situation. Its own applications were of course built on the Oracle database as well. If Oracle won a competitive bid against SAP, it picked up the revenue for both apps and database; if it lost to SAP, it still picked up the database cash. SAP, not surprisingly, was considerably less impressed.

That was back in the 1990s, but relations between the two have only declined since then. Oracle has made its applications business ambitions clear with a spending spree designed to beef up its market share; SAP has worked to lessen its dependence on the Oracle platform, although the vast majority of its customers are shared between the two firms.

"We thought the only way we could survive and prosper was through an acquisition strategy," said Oracle CEO Larry Ellison during the court hearings that came about following his firm’s hostile takeover of PeopleSoft. "Oracle had to consider a strategy we had never considered before. If we wanted to survive and grow, we would have to start an acquisition strategy.”

So Ellison and his cohorts have bought their way to second place in the applications market, but still a very distant second place to SAP. However, the firm is far from over its spending frenzy and makes no secret of its goal being to close the gap further and eventually overtake its German rival.

On the other hand, SAP insists that it will not get into the game of buying up customers. Chief executive Henning Kagermann has committed the company to having 100,000 customers by 2010, up from a current base of 37,000 – but he wants this to come from organic growth (leaving aside a few tactical acquisitions along the way!).

"[We are] doubling the addressable market to make it clear to investors that SAP doesn't depend on [the] growth rate of the markets, and we create our own markets,” he insists. ”We have 25 percent market share today. If we go for 35 to 40 percent, we will have more than double digit growth for the next few years. Consolidation is being driven by one company [Oracle], which we are not following because it's not a good solution.”

Dipping into the coffers

But SAP is not beyond the occasional dip into the corporate coffers when it feels so inclined, although such purchases tend not to be of the nature of Siebels and PeopleSofts with thousands of customers. Recently, for example, it bought business performance management firm Pilot Software which has only 150 customers.

“Unlike Oracle, but like IBM, SAP is seemingly keen to pursue small deals to fill in technology gaps and skillsets rather than pursuing bigger deals to acquire customers,” notes James Governor, founder of analyst firm Redmonk. “SAP can potentially grow the Pilot acquisition in the same way IBM has recent software acquisitions. SAP needs some new growth stories to ensure its status with the investor community. IBM’s recent financials make happy reading - SAP and Oracle’s recent outlooks on the other hand have been more cloudy.”

Meanwhile, the war of words between the two firms has been getting more and more unpleasant. "SAP appears to be rethinking their strategy as they lose application market share to Oracle. Kagermann is talking about an acquisition strategy to augment SAP's slowing organic growth," sneers Ellison. "We're going to be out in the marketplace [with the Fusion next-generation Oracle applications] for a full two years before SAP's next new applications. It's a tremendous opportunity for us to get way ahead of them."

Kagermann is having none of this. The party line from Walldorf: "Oracle's next-generation applications exist only in PowerPoint and won't be delivered until 2008 or beyond. In January, Oracle claimed they were halfway to Fusion and two weeks ago they said they were not even halfway done."

Now the two firms are locked in a legal battle amid allegations of corporate espionage. Oracle is claiming that: “SAP is engaged in systematic, illegal access to – and taking from - Oracle’s computerised customer support system… SAP has stolen thousands of proprietary, copyrighted software products and other confidential materials that Oracle developed to service its own support customers.”

Court papers filed by Oracle continue: “SAP gained repeated and unauthorised access, in many cases by use of pretextual customer log-in credentials, to Oracle’s proprietary, password-protected customer support website”.

The lawyers win again

The only winners to date are the lawyers. “The legal profession is making lucrative fees around the software industry at present, much of it focused around the protection of intellectual property (IP). This case will add to the revenues of this part of the industry,” reckons David Mitchell, software practice leader at analyst firm Ovum. “Most legal cases in software have focused on product-related IP. This case is different, in that it focuses on the IP around a support and service offering. It is interesting on two fronts.

“First, because support services are one of the highest margin parts of a software business, and companies will act to protect profitable businesses. Secondly, an increasing amount of work is going on across the entire industry to 'productise' people-based services, in a bid to make these services more repeatable, better quality for customers and at lower cost. However, this is a harder area to protect since there can often be a fine line between implicit know-how and explicit IP.”

So is this a storm in a teacup or have we reached Ragnarok - the inevitable head-on clash between the gods of the software firmament? “There are two primary scenarios that may emerge from the case,” predicts Mitchell. “Firstly, it is possible that the case will fizzle out very quickly and simply disappear from view. Secondly, it could drag on for some time, distracting the industry while simultaneously entertaining journalists around the world.”

Caught up in the friendly fire between the two warring factions are the customers on both sides. “One group of people that must not be forgotten in this turmoil is the customers of both SAP and Oracle,” says Mitchell. “Many of them are now wondering whether they have inadvertently benefited from this breach – not assuming that the case is well founded but doing a sensible risk-based analysis, in case it is.

“Oracle has no beef with SAP customers, only with SAP. Oracle could remove customer concerns by declaring that it would not pursue SAP customers for any breech of IP that SAP may or may not have undertaken. Not only would this give some welcome customer reassurance, it would also demonstrate that customers will not be punished for changing software or service providers.”

The battle rages on

And still the battle rages on with new moves to change the map of the software industry. Most recently there have been ludicrous rumours that Oracle might make a bid for SAP itself. While this is a highly entertaining conspiracy theory, it only takes a second or two’s consideration of the predictable (and in this case justifed) reactions of the Department of Justice in the US and the anti-monoply branches of the European Commission to realise that Ellison isn’t about to make any such move. He’s just not that daft.

But the acquisitions will continue with the most recent significant Oracle purchase of late being that of Agile Software, a move which Ovum’s Mitchell reckons changes the nature of the game. "The battle between SAP and Oracle shows no signs of easing up – if anything it is intensifying. However, it is also beginning to take a new turn,” he suggests.

"Both Oracle and SAP recognise the strength of their competitor in some vertical markets, and acknowledge their own sub-optimal position. Absolute détente never exists. However, there is a ‘realpolitik’ stance that some battles are too tough to fight. SAP was recognised as the category dominant in many of the asset intensive industries.

“Although Oracle never declared these markets as ‘no go’ territory, there was a tacit recognition that SAP was more difficult to attack here and that resources were better deployed in markets that had a stronger Oracle heartland. The JD Edwards acquisition brought Oracle additional strength and capability that it is using to improve its proposition in the asset intensive industries like high-tech, manufacturing and engineering. The resurgence of revenues for JD Edwards’ product demonstrates that there is certainly demand in the sector and that competition is welcomed by customers.

"While some of the other acquisitions could be characterised as short-term plays, the Agile deal is very much a longer term and strategic play. Of course, there is short-term merit in the deal, but the real value is in the long game. It offers Oracle the ability to develop into vertical markets where it has not traditionally been strong. It will allow Oracle to begin to take the game to SAP in its heartland.

“In this respect the gloves are coming off. However, nobody should expect an immediate short-term market shift. Manufacturing and other asset intensive industries do not change software platforms easily; they sweat software assets in the same way that they sweat physical assets. A 10-15 year software sweat lifecycle is not unusual. The adage that, ‘a dog is for life, not just for Christmas’, could have been created for this market."

So who will win the long game? Who knows? Neither compay is in danger of going anywhere anytime soon so corporate viabilty is not in question. For the moment, SAP’s leadership in the market is still significant, but both it and Oracle have next generation products to be rolled out. SAP to date has had well-documented issues with getting its customers up onto its latest releases; on the other hand, Oracle has yet to prove it can even deliver Fusion in its promised form, never mind get people to use it. One thing’s for sure in this war: it won’t be over by Christmas.

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